Microecon notes - Google Docs
Week 3: What determines price and quantity? Elasticity : R esponsiveness of buyers/sellers to price change ❖ Willingness of buyers/sellers to leave the market when conditions become unfavorable Demand elasticity ❖ Price elasticity of demand : Measures how much the quantity demanded responds to change in price ➢ Demand elastic → Quantity demanded responds s ubstantially to price change ➢ Demand inelastic → QD responds s lightly to price change ❖ Factors that affect price elasticity of demand: ➢ Availability of close substitutes ■ ex. If price of butter , its QD dramatically , since we can use margarine ➢ Time period ( longer time → more responsive buyers are to price change) ➢ Necessities(inelastic) or luxuries(elastic) ➢ Definition of the market (broad/narrow category) ■ Ex. Vanilla ice cream(very narrow) → elastic demand, since there are many other flavors to choose ❖ Pointprice elasticity : Measures demand elasticity at a specific point ➢ Price elasticity of demand = Percentage change in QD / Percentage change in P
❖ Arcprice elasticity : Measures demand elasticity between 2 points ➢ Midpoint formula
∂ means difference; ∂ Q / ∂ P = rise/run = slope ❖ Ex. if PED = 2 → change in QD is twice as large as the change in price ❖ Quantity demanded is always negatively related to its price (negative slope)→ ε D is always negative (demand curve), except crossprice elasticity The variety of demand curves: ❖ Perfectly inelastic: ε D = 0 ( vertical demand curve, demand is inelastic to price change) ❖ Inelastic: 1
